Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


Scientific Games bonds slip further on CFO resignation

Bonds backing Scientific Games slipped further today after the company announced the resignation of its Chief Financial Officer, Scott Schweinfurth, according to a company release. The 10% notes due 2022 shed 2.5 points to 77.625, yielding 15%, according to trade data. Meanwhile, sources quote the 7% notes due 2022 at 96/97, down from trades at 97.50 on Friday. The company’s shares are down nearly 4% at $7.62 today.

As reported last week, Scientific Games debt and equity came under pressure after the gaming technology company released third-quarter results that came in shy of Street expectations. The 10% notes, for instance, had been trading in the high 80s prior to the earnings release, before shedding five points on the results to the mid-80s and ending the week at an 80 context.

Loans backing Scientific Games are little changed today, with the B-2 tranche due 2021 (L+500, 1% LIBOR floor) recently marked at 92.75/93.75, though note the loan is about 5.5 points lower since the earnings release. According to the statement, Schweinfurth will continue in his role through the year-end financial audit and filing of its Form 10-K and the appointment of his successor.

Conditions are soft today in the high-yield market, with the cash market down about a quarter of a point and ETF sellers circulating, sources relay. The HY CDX 25 is quoted at 101.25, unchanged today, but down 1.3% week-over-week.

B+/B2 Scientific Games placed the $950 million issue of 7% secured notes and a $2.2 billion issue of 10% unsecured notes in November 2014 via a J.P. Morgan–steered underwriting team to help fund the Bally acquisition. The company also placed the $2 billion B-2 term loan in September 2014 to support the Bally transaction; the loan was issued at 99. Bank of America Merrill Lynch is administrative agent on the term loan. —Staff reports


LCD’s High Yield Market Primer/Almanac Updated with 3Q Charts

LCD’s online High Yield Bond Market Primer has been updated to include third-quarter 2015 and historical volume and trend charts.

The Primer can be found at, LCD’s free website promoting the asset class. features select stories from LCD news, weekly trends, stats, and analysis, along with recent job postings.

We’ll update the U.S. Primer charts regularly, and add more as the market dictates (new this time around: an historical look at Fallen Angels, courtesy S&P).

Charts included with this release of the Primer:

  • US High Yield Issuance – Historical
  • 2015 High Yield Issuance, by Purpose
  • High Yield LBO Issuance
  • Fallen Angels – Historical
  • Cash Flows to High Yield Funds, ETFs
  • PIK Toggle Issuance (or lack thereof)
  • Yield to Maturity: Historical, Recent

LCD’s Loan Market Primer and High Yield Bond Market Primer are some of the most popular pieces LCD has published. Updated annually (print) and quarterly (online) to include emerging trends, they are widely used by originating banks, institutional investors, private equity shops, law firms and business schools worldwide.

Check them out, and please share them with anyone wanting an excellent round-up of or introduction to the leveraged finance market.


Caesars Entertainment restructuring agreement fails to garner needed support

Caesars Entertainment Co. (CEC) said that its restructuring agreement with a group of second-lien lenders of bankrupt unit Caesars Entertainment Operating Corp. (CEOC) has failed to attract sufficient support from second-lien lenders, and therefore has expired and will not become effective.

The company said in a Form 8-K filed Sept. 21 with the Securities and Exchange Commission that it had been in discussions with second-lien lenders to extend the restructuring pact, but was unable to agree upon terms to do so. The company added, however, that notwithstanding the agreement’s expiration, it would “continue to engage in discussions with junior creditors on the terms of a consensual plan of reorganization for CEOC.”

The company also noted that the expiration of the RSA with second-lien lenders would “not affect” the separate restructuring pacts the company has entered into with first-lien noteholders and first-lien bank lenders, respectively.

As reported, the company announced the restructuring agreement with second-lien lenders on July 21, but said that it would not go effective until holders of more than 50% of the second-lien notes signed on.

The company did not disclose the level of support for the pact, but a report from Bloomberg at the time said that the noteholders agreeing to the pact held about 30% of the second-lien notes, and included names like Paulson & Co., Canyon Partners, and Soros Management.

“With the public announcement of the terms of this enhanced restructuring agreement, Caesars Entertainment and CEOC will seek to gain further support,” the company said at the time. Indeed, the pact included numerous provisions designed to induce support for the pact from lenders, including, on the carrot side, payment of potential forbearance fees and distributions of additional equity if second lien lenders sign on to the agreement, and on the stick side, threats of a cram down if they were to oppose the plan.

At the time it disclosed the agreement, the company was engaged in a last-ditch effort to convince a Chicago bankruptcy court judge to stay several lawsuits that had been filed against CEC by second-lien lender groups, even though CEC was not itself in Chapter 11, by arguing, among other things, that a consensual resolution of the issues being raised by second-lien lenders in the case was within reach.

Alternatively, the company warned that CEC could be forced to join its unit CEOC in bankruptcy if the lawsuits were allowed to proceed.

Second-lien holders have been a particular thorn in the company’s side, contending that a series of transactions entered into by the company over the past two years have been aimed at transferring valuable assets away from CEOC to the benefit of CEC’s shareholders, ultimately at the expense of CEOC’s second-lien lenders.

On July 22, however, the bankruptcy court ruled against the company, and allowed the lawsuits, pending in both New York and Delaware, to proceed. – Alan Zimmerman


Energy sector, Colt Defense focus of LCD’s Restructuring Watchlist

The beleaguered energy sector dominated activity this quarter on LCD’s Restructuring Watchlist, with Sabine Oil & Gas missing an interest payment on a bond and Hercules Offshore striking a deal with bondholders for a prepackaged bankruptcy.

Another high-profile bankruptcy this month was the Chapter 11 filing of gunmaker Colt Defense. Colt’s sponsor, Sciens Capital Management, agreed to act as a stalking-horse bidder in a proposed Section 363 asset sale. The bid comprises Sciens’ assumption of a $72.9 million term loan, a $35 million senior secured loan, and a $20 million DIP, and other liabilities.

The missed bond interest payment for Sabine Oil & Gas was due to holders of $578 million left outstanding of Forest Oil 7.25% notes due 2019, assumed through a merger of the two companies late last year.

The skipped payment comes after a host of other problems. Sabine Oil has already been determined to have committed a “failure to pay” event by the International Swaps and Derivatives Association, and will head to a credit-default-swap auction. The determination by ISDA is related to previously skipped interest on a $700 million second-lien term loan due 2018 (L+750, 1.25% LIBOR floor).

Meantime, Hercules Offshore on June 17 announced it entered a restructuring agreement with a steering group of bondholders over a Chapter 11 reorganization. The agreement was with holders of roughly 67% of its10.25% notes due 2019; the 8.75% notes due 2021; the 7.5% notes due 2021; and the 6.75% notes due 2022, which total $1.2 billion.

Among other developments for energy companies, Saratoga Resources filed for Chapter 11 for a second time, blaming challenges in field operations, the decline in oil and gas prices, and an unexpected arbitration award against the company. Thus, Saratoga Resources has been removed from the list. Another company previously on the Watchlist, American Eagle Energy, has been removed following a Chapter 11 filing in May.

Another energy company, American Energy-Woodford, could work itself off the Watchlist through a refinancing. On June 8, the company said 96% of holders of a $350 million issue of 9% notes due 2022, the company’s sole bond issue, have accepted an offer to swap into new PIK notes.

Also, eyes are on Walter Energy. The company opted to use a 30-day grace period under 9.875% notes due 2020 for an interest payment due on June 15.

Another energy company removed from the Watchlist was Connacher Oil and Gas. The Canadian oil sands company completed a restructuring in May under which bondholders received equity. The restructuring included an exchange of C$1 billion of debt for common shares, including interest. A first-lien term loan agreement from May 2014 was amended to allow for loans of $24.8 million to replace an existing revolver. A first-lien L+600 (1% floor) term loan, dating from May 2014, was left in place. Credit Suisse is administrative agent.

Away from the energy sector, troubles deepened for rare-earths miner Molycorp. The company skipped a $32.5 million interest payment owed to bondholders on a $650 million issue of first-lien notes. Restructuring negotiations are ongoing as the company uses a 30-day grace period to potentially make the payment.

In other news, Standard & Poor’s downgraded the Tunica-Biloxi Gaming Authority to D, from CCC, following a skipped interest payment on $150 million of 9% notes due 2015. Roughly $7 million was due to bondholders on May 15, and the notes were also cut to D, from CCC with a negative outlook. The company operates the Paragon Casino in Louisiana.

Constituents occasionally escape the Watchlist due to improving operational trends. Bonds backing J. C. Penney advanced in May after the retailer reported better-than-expected quarterly earnings and improved sales.

In another positive development, debt backing play and music franchise Gymboree advanced after the retailer reported steady first-quarter sales and earnings that beat forecasts. Similarly, debt backing Rue 21 gained in May after the teen-fashion retailer privately reported financial results, according to sources. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

Here is the full Watchlist, which is updated weekly by LCD (Watchlist is compiled by Matthew Fuller):

Watchlist 2Q June 2015



Trump Taj Mahal could file Chapter 11 ‘within days’ – report

trumptajTrump Entertainment Resorts last remaining casino, Trump Taj Mahal, could be headed to Chapter 11, according to a report yesterday afternoon in the New York Post.

According to the report, which cites anonymous sources, the company recently violated some of its loan covenants, and negotiations with lenders have not produced a restructuring solution. The report said that the company had hoped that Carl Icahn, who holds a significant chunk of the debt, would agree to a debt-for-equity exchange, but hopes for that “have faded.”

The Post said the filing could come “within days.”

Meanwhile, online news site reported that the Taj Mahal said in a financial filing on Aug. 22 that it could run out of cash needed to pay its bills, and it needed to either find additional borrowings or restructure its existing debt. The report did not specifically identify the filing or provide further details.

As reported, Trump Entertainment Resorts exited Chapter 11 for the third time on July 16, 2010, with Avenue Capital as the company’s largest shareholder (see “Trump Entertainment exits Ch. 11; no A/C in Atlantic City,” LCD, July 16, 2010). The reorganization featured, among other things, a $225 million rights offering backstopped by second-lien lenders, and led by Avenue, to fund distributions under the plan. The company’s first-lien lenders at the time, Beal Bank and Icahn, received a combination of cash proceeds and new secured debt, after the court rejected their rival plan proposal that would have exchanged their first-lien debt for equity.

Several months after its emergence, the company sold its Trump Marina Hotel Casino for $38 million (see “Trump Entertainment in pact to sell Trump Marina for $38M,” LCD, Feb. 15, 2011) leaving it with the Taj and the Trump Plaza.

The Trump Plaza is slated to close down on Sept. 16.

The news, if true, is just the latest blow to Atlantic City, which has seen numerous casinos close down recently. – Alan Zimmerman


Gaming and Leisure inks $1B pro rata facility to back Penn National spin-off

Gaming and Leisure Properties disclosed today that it has obtained a $1 billion senior unsecured credit facility in connection with its spin-off from Penn National Gaming.

The five-year loan package is split between a $700 million revolver and a $300 million A term loan. Pricing is tied to a ratings-based grid, ranging from L+100-200, with a commitment fee ranging from 15-30 bps. Pricing opens at L+175. Assuming the facility’s BBB-/Ba1 ratings are maintained, pricing is expected to fall to L+150 three months after the closing date.

Earlier this month, Gaming and Leisure Properties completed a $550 million offering of 4.375% senior notes due 2018, a $1 billion offering of 4.875% notes due 2020, and a $500 million offering of 5.375% notes due 2023. Proceeds were used to back the spin-off. Lead bookrunners on the 2018 and 2023 series were Bank of America, J.P. Morgan, and RBS, while lead bookrunners on the 2020 notes were Bank of America, RBS, and Goldman Sachs.

Gaming and Leisure Properties’ spin-off became effective today. The company is now a separate company that owns the real estate associated with 21 casinos, including two facilities that are currently under development in Ohio.

Gaming and Leisure Properties is rated BB+/Ba1. – Richard Kellerhals


Station Casinos readies $2B leveraged loan deal

Bank of America Merrill Lynch, Deutsche Bank, J.P. Morgan and Credit Suisse have scheduled a bank meeting for 1:30 p.m. EST on Thursday, Feb. 14, to launch a $1.975 billion senior secured financing for Station Casinos, according to sources.

The proposed financing is split between a $1.625 billion B term loan and a $350 million revolving credit facility. Additional details were not available at press time.

The gaming concern was last in market in September with a $775 million loan, for which Station Casinos NP Opco LLC and Station GVR Acquisition were co-borrowers. That transaction included a $200 million, five-year revolver and a $575 million, seven-year B term loan.

The institutional loan cleared the market at L+425, with a 1.25% LIBOR floor and a 99.25 offer price. It includes one year of 101 soft-call protection. Proceeds were used to refinance Station Casinos’ opco debt and loans issued by GVR.

For reference, as of Sept. 30, the company also had in place about $804 million of term debt and $521 million of notes issued at the propco level, SEC filings show.

Station’s properties are located throughout the Las Vegas Valley and include various amenities, including restaurants, entertainment venues, movie theaters, bowling and convention/banquet space, as well as traditional casino-gaming offerings. The company is rated B/B3. – Kerry Kantin


Foxwoods proposes $520M debt reduction in final restructuring terms

The Mashantucket Pequot Tribal Nation, the Tribal gaming concern that owns Foxwoods Resort Casino, made public the finalized terms for its proposed restructuring, highlighting a $520 million reduction in debt, according to documents released on the municipal market disclosures website.

The consensual restructuring outlined would take outstanding debt to $1.72 billion, from $2.24 billion, while changing rates, terms and maturities. LCD had outlined some of the initial details of the proposal when it was announced in August. The finalized proposal preserves but extends the senior debt and special-revenue obligations, applies discounts to its subordinated special-revenue obligations and 8.5% notes, and adjusts the term and interest rates on the debt instruments and provides further mechanisms for holders of SSROs and 8.5% notes to receive additional recoveries if cash flows are available.

The total leverage will be knocked down to 7.8x, from 10.2x, according to an analysis by GLC Advisors & Co. released alongside the proposal.  GLC is the financial advisor to holders of the existing uninsured SRO, SSRO and notes. MPTN’s financial advisor for the restructuring is Miller Buckfire & Co., and its legal counsel is Weil, Gotshal & Manges.

The trustee and its counsel, Mintz Levin, will host a conference call for SSRO holders and other market participants to discuss the restructuring proposal and how it relates to the SSROs on Wednesday, Oct. 3, at 1:00 p.m. EDT, according to the notification on Friday.

Specifically, from top to bottom of the capital structure, the proposal would give Kien Huat I and II, which consist of $6 million and $15 million respectively, recovery in full from the A term loan. The $549 million bank facility will be replaced by A, B, and C term loans. The new A term loan due 2017 totals $310 million and is priced at L+400. The $260 million B term loan due 2019 is priced at L+687.5. There will also be another $27 million in senior debt, comprised of a $12 million revolver and $15 million C term loan, both due in 30 months.

The SROs, which total $609 million, including accrued and unpaid interest through Sept. 30, will become $619 million in new SROs maturing in 2025 instead of 2021, with a 7.25% rate (6.25% cash, 1% PIK), which toggles to all cash after close with a cash-flow sweep.

The SSROs, which currently total $415 million, including accrued and unpaid interest, will become $293 million in 18-year SSROs at 7.15% for three years and 6.05% thereafter.

To replace the existing 8.5% notes, there will be $208 million of new PIK-toggle notes due 2035, down from $643 million on the principal and unpaid interest portions of 8.5% notes due 2015. The new coupon is 6.5%, with 1% of in cash and the other 5.5% PIK, and it toggles to cash after eight years.

Tribal disbursements will be $42.5 million in the first year, $40 million the following year, and $35 million annually by the third year, with additional payouts dependent upon available excess cash flow. The Tribe’s share of excess cash flow will begin at 8.5% and increase to 66.75% over time as each debt facility is paid off. The Tribe will also sweep 70% of excess cash flows from new business, which will include Internet gaming. – Max Frumes


Contentious two-day hearing reveals Patriot Coal venue dispute as vexing call

The question of whether to change the venue of Patriot Coal’s Chapter 11 case to West Virginia from the Southern District of New York is proving to be not only a contentious one for the parties involved, but also a vexing one for Bankruptcy Court Judge Shelley Chapman, if a two-day hearing this week in Lower Manhattan was any indication.

The venue hearing went on longer than most had anticipated, with day one lumbering through arguments from the proponents of a venue change – led by the United Mineworkers of America and the U.S. Trustee – and day two’s proceedings running an epic 13 hours, ending around 11:00 p.m. EDT without a ruling.

Unsurprisingly, Chapman said she would issue a decision at a later date, though she did not commit to a specific time frame. Given the controversial legal issues involved, and the considerable discretion the law affords Chapman in deciding the matter, she may want to issue a detailed written opinion explaining her specific factual findings and legal reasoning in anticipation of a possible appeal – although she is under no obligation to do so.

Venue challenges are relatively rare in large corporate bankruptcies, despite a considerable amount of forum shopping that results in the filing of many large cases in Manhattan and Wilmington, Del. Still, the issue has been a subject of conversation and controversy among legal academics for some time (see “Bankruptcy Trends: Forum-shopping debate heats up again,” LCD News, March 25, 2011).

In many ways, the debate in the Patriot Coal motion mirrors the academic debate; namely, the balancing of a debtor’s connections to and business activities in a chosen venue (or the lack thereof) against the overall convenience of the parties involved in the bankruptcy case itself, such as creditors, attorneys, lenders and potential investors, among others. The key difference, of course, is that in Patriot Coal the stakes are tangible; Chapman ultimately will have to render a decision in the matter that not only will have to address abstract legal issues, but also will carry financial implications for the company and its stakeholders, as well as potentially setting precedent for future cases.

The background

Patriot Coal filed for bankruptcy protection in Manhattan on July 9. Ten days later, the United Mine Workers, a union representing 42% of the company’s employees, filed a motion to transfer venue in the case to Charleston, W. Va., in the “interests of justice,” arguing that most of the company’s business and employees are located there, and that the state of West Virginia has a much more significant interest in the company’s reorganization than does New York (see “Patriot Coal union says Ch. 11 should be moved to West Virginia,” LCD News, July 19, 2012).

“No one mines coal in New York,” the union said in its motion.

The company (supported by numerous creditors) and several other key stakeholders, including the unsecured-creditors’ committee in the case, objected to the transfer of venue, responding that New York was a more convenient forum for most of the company’s creditors, the professionals working on the case, DIP lenders, and even the UMW itself, the headquarters of which is located in suburban Washington, D.C. “Experience has shown that the most frequent attendees at court hearings – by far – are the debtors’ professionals, the lenders’ professionals, and other material counterparties and their professionals, almost all of whom are located in New York in this case,” the company said (see “Patriot Coal defends its filing of Chapter 11 case in Manhattan,” LCD News, Aug. 29, 2012).

As for the company’s employees and retirees in West Virginia, Patriot Coal said the union “overstates the importance of the location of employees and retirees,” arguing, “It is not expected that more than a handful of employees or retirees would ever need to be present in this court.” And, the company said, “To the extent that union members – or any interested individuals – wish to monitor the proceedings, well-established technology will allow them easily and conveniently to do so.” More specifically, the company suggested that its employees and retirees could view proceedings via videoconferencing.

The UMW responded to those arguments, however, saying, “The objections give short shrift to the interests of justice standard and the principle that bankruptcy cases should be decided in a district with which the debtors have a connection.”

In seeking to focus the bankruptcy court’s attention on the “interests of justice” criteria, rather than convenience of the parties, the UMW argued that Patriot Coal’s reorganization is “not primarily about the rights of creditors, nor is it primarily about obtaining adequate financing.” Rather, the union contends, “As debtors have repeatedly declared, this is a case about their obligations to unionized workers and retirees and West Virginia’s interest in responsible environmental regulation of mining operations within its borders.”

The union also noted that anticipated Section 1113 and 1114 motions seeking to reject collective-bargaining agreements and retiree-benefit plans promised to figure prominently in the proceedings, concluding, “Where the business activity and relationships that gave rise to the labor costs and other liabilities at issue are rooted primarily in the West Virginia coalfields, it would not be in the interests of justice to uphold debtors’ blatant forum shopping.”

Meanwhile, the U.S. Trustee for the New York bankruptcy court also filed a motion arguing that venue should be transferred from the jurisdiction, on the grounds that the company’s creation of two New York subsidiaries shortly before its filing – apparently for the sole purpose of establishing venue in the state – was improper. Unlike the UMW, however, the U.S. Trustee did not urge a transfer to any other specific court.

Still, this represents the second large corporate case in a row in Manhattan in which the U.S. Trustee has raised questions regarding venue. This summer, the Trustee succeeded in having the prepackaged bankruptcy of Houghton Mifflin Harcourt Publishing transferred to bankruptcy court in Boston.

It is worth noting, however, the significant differences in the legal bases behind the Houghton Mifflin venue flap and those in Patriot Coal. In Houghton Mifflin, the U.S. Trustee argued that there was no legal basis for venue in Manhattan and that the bankruptcy court therefore had no choice but to either dismiss the case or transfer it to another court (see “Bankruptcy Trends: A look at the Houghton, Patriot Coal venue tiffs,” LCD News, Aug. 10, 2012).

Even so, Manhattan Bankruptcy Court Judge Robert Gerber refused to transfer the case until after he confirmed the company’s reorganization plan and allowed Houghton Mifflin to emerge from Chapter 11, ensuring that a venue transfer would not derail the company’s prepackaged plan that creditors unanimously supported. Only then did he move the case to Boston.

In Patriot Coal, neither the UMW nor the U.S. Trustee argues that Manhattan is an impermissible venue; rather, the venue transfer they are seeking is one based on the clear discretion of the bankruptcy court determining that there is another, more preferable venue.

In some ways, that puts Chapman in tougher pickle than the situation in which Gerber found himself, as she seeks to balance her view of the law’s venue requirements, wrapped in inherently ambiguous legal concepts like “the interests of justice” and “convenience of the parties,” in light of Manhattan’s preeminent position as a legal and financial center. Indeed, Manhattan’s position makes it a desirable and efficient bankruptcy venue of choice for large, complex companies, even those that may have relatively limited connections to the jurisdiction of the kind that typically form the bases of proper venue – companies such as Enron, WorldCom, General Motors, Chrysler, and, perhaps, Patriot Coal.

A more impartial court?

Two-way video monitors crowded Judge Chapman’s recently renovated courtroom, set up to broadcast the proceedings to courthouses in West Virginia and St. Louis, where miners, retirees, and employees at the company’s headquarters were able to watch – and only watch – the arguments made for and against the transfer.

Chapman made clear that the special broadcast was set up using existing courtroom equipment, at no cost to the estate. Per her custom, before the hearing began Chapman also read off a list of more than a dozen parties listening to the proceedings on the phone via CourtCall, a pay service often used by lawyers and financial parties instead of attending a hearing in person.

Patriot Coal lawyer Marshall Huebner, of Davis Polk & Wardwell, was first on the stand, offering a few prefatory remarks before turning the microphone over to the UMW lawyers, upon whom, he reminded the court several times, the burden of proof rested in this matter.

“There’s not really a disagreement about the facts,” said Huebner. “There may be very virulent disagreement about the interpretation of those facts.” He was right.

Susan Jennik, of New York firm Kennedy, Jennik & Murray, took the stand for the UMWA and began by noting that “hundreds” of mineworkers and retirees were watching from the courthouse in West Virginia. Chapman stopped her right there, asking that Jennik refrain from announcing how many people were watching remotely unless an accurate number could be provided for the record.

It’s worth noting that Chapman runs a tight ship. No joke she made, for example, went without a disclaimer, and she scolded lawyers for bringing snacks into her courtroom. She also asks a lot of questions, and it was rare for a lawyer to complete an argument without facing a barrage of queries and hypotheticals from her.

And Jennik, whose specialty is labor law, not bankruptcy, was interrupted more than anyone else.

Jennik’s argument hinged in large part on the experience with coal cases that judges in West Virginia have. “This industry is very specialized, particularly in the environmental damage that can be done in coal mining,” Jennik said. The business accounts for 12% of West Virginia’s gross state product. “I think the level of experience of those judges with those coal cases and the very specialized terminology would be a factor to be considered.”

It was a position that clearly held no sway with Chapman.

“This issue you’re raising, the familiarity, the fact that the judges have grown up with coal miners, that gives me some pause,” Chapman said. “In my mind, the tribunal should be completely impartial. It should be when the court doesn’t know the parties. … The fact that you’re asking me to transfer the case to a court you believe is more sympathetic, gives me pause. And for some reason, I can’t tell why, you imply this court would be less sympathetic.”

Jennik moved on to the question of convenience, but faced no less skepticism. The convenience of the professionals should not decide venue in this case, Jennik said. And while Chapman dismissed Patriot counsel’s suggestion that West Virginia was an inconvenient venue in part because planes to Charleston hold only 37 people, she also pointed out that “there are only so many seats in the courtroom, and it’s unusual to have a large number of workers and employees who attend.”

“I hear you,” she told Jennik. “I like being in the courtroom, but as a practical matter, how different would it be from what we have here today?”

“It’s an abuse of the statute”

Arguing for the U.S. Trustee, Andrea Schwartz took a different tack. “We’re asking the court to exercise the discretion afforded it by Congress, and in the interest of justice, transfer the case to another district where venue is proper.”

“Our motion is not complicated, and it is narrowly circumscribed,” Schwartz continued. “The cases before this court should not be here. The only reason they are here is that the debtors, with the assistance of Davis Polk, created two non-operating affiliates in New York solely to satisfy venue.”

“If the entities had formed six months ago, what would your position be?” Chapman asked. The same, Schwartz said. “We’re not contesting that they didn’t satisfy [the statute], we’re saying it’s an abuse of the statute.”

“This isn’t Houghton-Mifflin,” Chapman said. “Gerber agreed with you, even though everybody in the case was happy to have it here. This is a completely different case. It may be that management engaged in an analysis that it would be better for the company – not that this district would be more inclined to approve management bonuses.”

Patriot’s principal assets in New York amount to less than 3/1,000ths of 1% of its total assets, Schwartz said. “It was never intended that companies as huge as this could simply say New York is the best, it is the most convenient, it has the most consistency, has the best courthouses. I only have to form an LLC to establish venue. I don’t think that’s what Congress intended.”

The video feed to West Virginia needed to end at 5:00 p.m. EDT, bringing day one of the proceedings to an end.

Picking up again at 10:00 a.m. EDT on day two, Schwartz stressed that the U.S. Trustee is not asserting bad faith in Patriot’s establishing venue in New York, but said that Judge Chapman need not find bad faith in order to transfer the case. “If companies were allowed to create facts to fit the statute, then why have the statute at all?” she asked.

Reading tea leaves

Brian Meldrum, of Stites & Harbison, represents four surety movants with a total exposure of about $67 million – the penal amount of reclamation bonds covering Patriot Coal’s environmental obligations. “The nature of the debtors’ operations on the ground in West Virginia give West Virginia a unique and profound interest in the case,” Meldrum said. Of Patriot’s $3.7 billion in assets, $2.9 billion is in land and coal reserves, found largely in West Virginia.

But this, too, was of limited importance in Chapman’s eyes. “The coal is in the ground in West Virginia, absolutely,” she said. “Why does it follow inexorably from that premise that there’s any compelling reason for the case to be heard by a West Virginia judge? This court has presided over dozens, if not hundreds of cases involving very serious environmental issues. … So the argument that this court isn’t capable of hearing the facts and judging them, I don’t buy it.”

The proceedings took a sharp turn when Morgan Lewis partner John Goodchild came to the stand, on behalf of the 1974 Pension Trust of the UMWA, asking Patriot’s lawyers to identify any and all potential witnesses in the courtroom. “Until yesterday, I didn’t intend to call any witnesses,” Goodchild said. “Yesterday, it became clear in my view that Your Honor believes that there is more to the debtors’ intent than simply…”

“You don’t know what I believe,” Chapman interjected. “The court asks questions, and the only thing that happened yesterday was that you tried to read the tea leaves of what I was asking, and decided maybe you better call a witness because the moving parties didn’t discharge their burden.”

Chapman ultimately denied his request, but Goodchild outlined the questions he would have posed: Was there an analysis done regarding where to file the case, and what was that analysis? Who was involved in that decision, and who made it? When was that decision made? What information and considerations were taken into account in making that decision? What alternatives, in terms of venue, were considered? Why choose New York – what were the positives and negatives?

“I can say from bitter experience that my clients fare differently in different jurisdictions,” Goodchild added. “So the principle that the US Trustee is elucidating has a very real impact on my clients. … There are significant differences in the circuits in areas that do matter in this case.”

Forum shopping vs. forum selection

Returning to the stand to defend Patriot, Huebner offered a lengthy and multipronged rebuttal to the arguments of the first day and a half. His position would consist of six points, the last of which had 11 parts, he said.

But the point he returned to most frequently was the importance of finding a court that would approve Patriot’s $802 million DIP. “The financing is one of the reasons we filed in New York, because of the guidelines on roll-up mega DIPs, which West Virginia does not have. In one jurisdiction there is a much more robust track record, or experience, in large, weird exit financing. That was one of our calculations.”

Several times throughout the hearing, Chapman noted that she sees an important distinction between forum shopping and forum selection – running away from something as opposed to running to something. She reined in Huebner time and again when he overstated Patriot’s ties to New York, and reminded him that, for the miners, this case is “all or nothing,” while the large economic creditors will no doubt survive, even if they see a loss in this case. – John Bringardner/Alan Zimmerman